General Court decision in Illumina/Grail to lead to greater EU merger control scrutiny of sub-threshold deals?
General Court decision in Illumina/Grail to lead to greater EU merger control scrutiny of sub-threshold deals?
On 13 July 2022, the General Court of the European Union (the General Court) handed down its judgment in Case T-227/21 concerning an action brought by Illumina, Inc. (Illumina) and Grail LLC (Grail) to challenge the decision of the European Commission (the Commission) to review the acquisition of Grail by Illumina (the Transaction).
The Guidance Paper
In March 2021, the Commission published a guidance paper (the Guidance Paper) that represented the findings of a contemporary evaluation of Council Regulation (EC) No 139/2004 of 20 January 2004 (i.e. the EU Merger Regulation (EUMR)) – see a previous ALG alert on this here. The Guidance Paper, in particular, outlined a new approach to Article 22 EUMR.
Article 22 EUMR allows for Member States to request the Commission to examine any acquisition that does not have an EU dimension but: (i) affects trade between Member States and (ii) threatens to significantly affect competition within the territory of the Member State (or Member States) making the request. Historically, this provision was in place to deal with transactions relevant to Member States which had no merger control regimes.
The new approach to the acquisition referral mechanism outlined in the Guidance Paper detailed that the Commission intended, in certain circumstances, "to encourage and accept referrals in cases where the referring Member State does not have initial jurisdiction over the case, where the criteria of Article 22 are met."
Previously, the Commission had discouraged referrals of acquisitions under Article 22 EUMR that were under national merger control thresholds as they weren't generally considered likely to have a significant impact on the internal market.
The momentum spurring this new approach was the increase in so-called "killer acquisitions", the acquisition of start-ups or nascent firms by larger, dominant incumbents. Typically, such acquisitions fall below merger notification thresholds. However, the Commission had become apprehensive about the effect of these acquisitions on competition and innovation, especially in the tech and pharma sectors, leading it to publish this updated Guidance Paper.
Illumina is a pharma company that supplies sequencing solutions for genetic and genomic analysis. Grail is also a pharma company that develops blood tests for the early detection of cancers. In September 2020, Illumina and Grail announced a plan for Illumina to acquire sole control of Grail (the Transaction), in which it already held a 14.5% ownership stake. The Transaction was not notified to the Commission because it did not meet the relevant Commission turnover thresholds for notification and Grail did not generate any revenue in any EU Member State.
In December 2020, the Commission received a complaint relating to the Transaction, which led the Commission to inform Member States about the Transaction on 19 February 2021 and invited them to submit a referral under Article 22 EUMR. On 9 March 2021, the Autorité de la concurrence (the French Competition Authority) made a referral request to the Commission asking it to examine the Transaction pursuant to Article 22 EUMR. On 11 March 2021, the Commission informed Illumina and Grail of the referral request. The competition authorities of three further Member States subsequently joined this referral later in March. On 31 March 2021, the Commission published the new Guidance Paper.
The referral request was accepted by the Commission on 19 April 2021 and on 28 April 2021 Illumina, supported by Grail, filed an action in the General Court seeking annulment of the Commission decision to review the Transaction, leading to the first legal test of the new approach set out in the Guidance Paper.
Further to the decision to review the Transaction, the Commission decided on 22 July 2021 to progress to opening an in-depth investigation. On 18 August 2021, while the Commission's investigation was still ongoing, Illumina publicly announced that it had completed its acquisition of Grail. This prompted the Commission to open a parallel investigation to ascertain whether the Transaction had breached the "standstill obligation" under the EUMR, where merging companies must not implement a transaction unless and until the transaction has been notified and subsequently cleared by the Commission. This practice of early implementation is colloquially known as "gun-jumping".
The Decision of the General Court
The first argument that the judgment of the General Court (the Judgment) addressed was the assertion of the Commission that Grail had lost its status as an intervener due to the transaction closing between the time the action had been filed and the subsequent hearing, meaning that Grail, Inc had become Grail LLC, a new entity wholly controlled by Illumina. The Judgment noted that Grail LLC is a legal person under the company law of the United States and as such, Grail LLC succeeded Grail, Inc as its successor in title. It was held that an action for annulment may be brought by a successor in title where a legal person ceases to exist and all rights and obligations are transferred to another person. Accordingly, the Commission's request to withdraw Grail's status as an intervener was rejected.
The Commission also argued that the action taken by Illumina was inadmissible. The General Court stated that "measures which determine the position of an institution upon the conclusion of an administrative procedure, and which are intended to have legal effects" are acts which are open to challenge (e.g. the letter from the Commission to Member States on 19 February 2021), distinguishing these acts from intermediate measures which prepare for a final decision and do not have legal effects (e.g. the decision of the Commission to accept the referral on 19 April 2021). The General Court ruled that the action was admissible insofar as it was directed against the former act.
Illumina's arguments were threefold:
That the Commission lacked the competence to initiate an investigation into the Transaction given the Transaction did not satisfy the conditions allowing Member States to examine it under domestic rules.
That the referral request was made outside the prescribed time limits and that the Commission, by informing Member States about the Transaction, undermined the principle of legal certainty.
That the Commission undermined legal certainty and legitimate expectations due to a previous statement from the Commissioner for Competition that the Commission policy would not change until the new approach under the Guidance Paper was in place.
First Argument – Commission Jurisdiction
As regards the first argument of Illumina, the General Court conducted a literal, historical, contextual and teleological (purposive) interpretation of Article 22 EUMR. In so doing, the General Court held that a Member State is entitled to refer any transaction to the Commission which satisfies the conditions set out in Article 22, regardless of the existence or scope of national merger control rules.
The General Court also confirmed that, whilst the historical intention of the drafting of Article 22 was to cater for Member States without a merger control system, it was never the goal of the legislators to limit the applicability of Article 22 to that situation alone. Rather, the goal was to strengthen the application of competition law to transactions with cross-border effects and to reduce the need for multiple filings (the "one-stop shop" principle).
It was further stated that Article 22 does not expressly require the national competition authority to be competent to examine the transaction that is the subject of the referral, nor does it require the transaction to be notified. As such, it was held that a referral request under Article 22 can be submitted to the Commission irrespective of the scope of the national merger control rules.
Finally, the General Court's teleological (purposive) interpretation of Article 22 held that the EUMR sought to base the Commission's powers of investigation primarily on turnover thresholds, but also supplemented those thresholds with "effective corrective mechanisms" that constitute the referral mechanisms. The General Court said that the referral mechanisms allow examination of all transactions that merit examination at European level, but which may not reach the rigid thresholds. The General Court held that this interpretation further confirmed the ability of Member States to refer under Article 22 EUMR, regardless of national merger control rules.
The General Court did not accept the arguments of Illumina that the existence of national merger control rules serve to restrict Commission competence and that the Commission was breaching the principles of subsidiarity and proportionality by acting beyond its competence. The General Court reiterated the concept of the referral request acting as no more than an effective corrective mechanism in this regard.
Second Argument – Time Limits for Referral Request
The General Court did not accept Illumina's second argument and held that the information only "became known" to the Member States for the purposes of Article 22 upon the receipt of the letter from the Commission dated 19 February. The referral request was then submitted on 9 March and therefore was within the mandatory 15 working day timeframe. Whilst acknowledging the delay of the Commission in sending this letter to the Member States, the General Court nevertheless did not agree with Illumina's assertion that its rights of defence had been infringed as a result of this delay.
Third Argument – Legitimate Expectations and Legal Certainty
Illumina's final argument stated that, at the time when it announced its intention to acquire control of Grail, the Commission did not accept referral requests in respect of transactions that did not fall within the scope of national merger control rules. Illumina said that it had relied on a speech given by Commissioner Vestager on 11 September 2020 as creating legal certainty and legitimate expectations. In this speech, Commissioner Vestager said that the existing policy would apply until new guidance was published in 2021. However, the Guidance Paper was published after the Commission had written to member states on 19 February 2021. The General Court said that in order to rely on the principle of legitimate expectations, "precise, unconditional and consistent assurances originating from authorized, reliable sources" must have been given to Illumina by the competent authorities of the EU. The General Court held that Commissioner Vestager's speech did not offer any such assurances.
Some Practical Implications for Irish Businesses
The decision of the General Court (which may yet be appealed to the European Court of Justice) might spur the Commission to use its Article 22 power to examine sub-threshold transactions more frequently. Companies operating in the tech and pharma sectors should be particularly aware of this development.
Subsequent to the General Court's decision, the Commission confirmed on 19 July 2022 that it had sent a Statement of Objections to Illumina and Grail claiming that the companies had breached the EUMR by early implementation of the Transaction. Whatever the final outcome of this case, businesses must continue to be aware of the risks associated with gun-jumping.
This decision should be read in light of the upcoming EU Digital Markets Act (DMA), which is expected to enter force in autumn 2022. Article 14 of the DMA obliges large tech platforms ("gatekeepers") to inform the Commission of any intended acquisition of other tech companies or transactions that enable the collection of data. Article 14(5) expressly enables national competition authorities to request the Commission to examine any of these transactions. As such, businesses operating in the tech sector can expect additional referrals to the Commission.
From an Irish merger control perspective, the Competition Act 2022 (see here) has added a new power for the CCPC to be able to "require" parties to a below threshold deal to notify the CCPC if it thinks that the deal "may... have an effect on competition" in Ireland. This requirement to notify the CCPC can apply whether or not the deal has already been put into effect. The similarities between this provision and the new Commission approach to Article 22 EUMR represents a degree of alignment between Dublin and Brussels in terms of merger policy, and a stricter regime for businesses both at a national and an EU level. It remains to be seen how the Commission's Article 22 powers and the CCPC's new powers to require notification of sub-threshold deals will work in practice.